The Buffer Stock Model

2017 ◽  
Author(s):  
Tullio Jappelli ◽  
Luigi Pistaferri
Keyword(s):  
Marginal Utility ◽  
Credit Constraints ◽  
Liquidity Constraints ◽  
Borrowing Constraints ◽  
Precautionary Saving ◽  
Buffer Stock ◽  
Borrowing Constraint ◽  
Stock Model ◽  
Intertemporal Decisions ◽  
Period Model

We analyze models that combine precautionary saving and liquidity constraints to provide a unified, more realistic treatment of intertemporal decisions. We start off with a simple three-period model to illustrate how the expectation of future borrowing constraints can induce precautionary saving even in scenarios in which marginal utility is linear. A more general model that allows liquidity constraints and precautionary saving to interact fully is the buffer stock model, of which there are two versions. One, developed by Deaton (1991), emphasizes the possibility that a prudent and impatient consumer may face credit constraints. The other, by Carroll (1997), features the same type of consumer but allows for the possibility of income falling to zero and so generating a natural borrowing constraint.

The Self-Constrained Hand-to-Mouth

2021 ◽  
pp. 1-45
Author(s):  
Michael Gelman
Keyword(s):  
High Frequency ◽  
Liquidity Constraints ◽  
Exponential Model ◽  
Personal Finance ◽  
Buffer Stock ◽  
The Self ◽  
Proximate Cause ◽  
Ultimate Cause ◽  
Stock Model ◽  
Excess Sensitivity

Abstract Many studies have shown that consumption responds to the arrival of predictable income (excess sensitivity). This paper uses a buffer stock model of consumption to understand what causes excess sensitivity and to test which parametrization is consistent with empirical excess sensitivity estimates. Using high frequency granular data from a personal finance app, it finds that while liquidity constraints are a proximate cause, preferences are the ultimate cause of excess sensitivity. Furthermore, it finds that for feasible parameters, a quasi hyperbolic version of the model is more consistent with the level of excess sensitivity relative to a standard exponential model.

Anatomy of Corporate Borrowing Constraints*

2020 ◽  
Vol 136 (1) ◽  
pp. 229-291 ◽  
Author(s):  
Chen Lian ◽  
Yueran Ma
Keyword(s):  
Asset Price ◽  
Cash Flows ◽  
Borrowing Constraints ◽  
Collateral Damage ◽  
Total Debt ◽  
Borrowing Constraint ◽  
Corporate Borrowing ◽  
Physical Assets ◽  
Macro Finance ◽  
Nonfinancial Firms

Abstract Macro-finance analyses commonly link firms’ borrowing constraints to the liquidation value of physical assets. For U.S. nonfinancial firms, we show that 20% of debt by value is based on such assets (asset-based lending in creditor parlance), whereas 80% is based predominantly on cash flows from firms’ operations (cash flow–based lending). A standard borrowing constraint restricts total debt as a function of cash flows measured using operating earnings (earnings-based borrowing constraints). These features shape firm outcomes on the margin: first, cash flows in the form of operating earnings can directly relax borrowing constraints; second, firms are less vulnerable to collateral damage from asset price declines, and fire sale amplification may be mitigated. Taken together, our findings point to new venues for modeling firms’ borrowing constraints in macro-finance studies.

scholarly journals Persistent vs. Permanent Income Shocks in the Buffer-Stock Model

2016 ◽  
Vol 17 (1) ◽  
Author(s):  
Jeppe Druedahl ◽  
Thomas H. Jørgensen
Keyword(s):  
Permanent Income ◽  
Buffer Stock ◽  
Income Shocks ◽  
Stock Model

AbstractWe investigate the effects of assuming a

The Precautionary Saving Model

2017 ◽  
Author(s):  
Tullio Jappelli ◽  
Luigi Pistaferri
Keyword(s):  
Liquidity Constraints ◽  
Precautionary Saving ◽  
Income Risk ◽  
Quadratic Utility ◽  
Excess Sensitivity

The chapter removes the assumption of quadratic utility and examines situations in which consumers respond to income risk by increasing current saving to protect against future shocks to income. This motive for saving is called precautionary saving, and it provides an explanation for some of the empirical findings in the literature, such as the observation that people with more volatile incomes tend to save more than individuals with more stable income patterns. Moreover, it can also explain the excess sensitivity of consumption to expected income changes. Indeed, a model with precautionary saving produces a good many predictions similar to those of the model with liquidity constraints.

scholarly journals Consumption Response to Credit Expansions: Evidence from Experimental Assignment of 45,307 Credit Lines

2022 ◽  
Vol 112 (1) ◽  
pp. 1-40
Author(s):  
Deniz Aydin
Keyword(s):  
Field Experiment ◽  
Precautionary Saving ◽  
Buffer Stock ◽  
Liquid Asset ◽  
The Third ◽  
Credit Lines ◽  
Long Run ◽  
Short Run

In a field experiment that constructs a randomized credit limit shock, participants borrow to spend 11 cents on the dollar in the first quarter and 28 cents by the third year. Effects extend to those far from the limit, those who had the new limits as available credit, and those with a liquid asset buffer. In the short-run, flexible and installment contracts are used in tandem, with unconstrained using installments more. Long-run borrowing is predominantly using installments. Near limits, participants borrow when credit expands but save out of constraints when limits are tight. Findings support a buffer-stock interpretation emphasizing precautionary saving. (JEL C93, E21, G21, G51, O12, O16)

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